Sunday explainer: why is electricity so expensive?

Power is expensive in Australia. Even in Victoria, it's more expensive here than in most other places around the world.

But wait! Why should this be? Don't we have massive coal reserves? And don't we burn coal for almost all our energy? Why should we pay through the nose?

This week, we were reminded by Maurice Newman, business advisor to now-former Prime Minister Tony Abbott, that Australia has the sixth-most-expensive energy in the world. Why, for God's sake? Why?

What's in a bill?

According to the Australian Energy Market Commission, your electricity bill is made up of three components:

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- Wholesale and retail prices, based on supply and demand;

- The cost of poles and wires, and;

- The cost of environmental policies.

Nation-wide, these three components make up 39 per cent, 53 per cent and 8 per cent of the average bill, respectively.

Let me repeat – nationwide, there is significantly less money involved in getting coal (primarily) out of the ground, getting it to the power stations, burning it for power and selling that power twice (once by the wholesaler to the retailer and once by the retailer to you) than there is in transmitting the electricity from the generator to your fusebox.

Why are the poles and wires so expensive?

Australians now are paying the cost of one big policy slip: the multi-billion-dollar upgrade to the network – primarily in NSW and QLD.

There's a lot of history in this story, but it boils down to $45 billion spent between 2009 and 2014 on network upgrades of pretty questionable value.

A big chunk of the spending was approved because of forecasts that electricity demand would skyrocket, and the threat of rolling blackouts if the network wasn't upgraded.

Instead, demand has fallen significantly, thanks in no small part to the aggressive adoption of solar panels nationwide. But these facts aren't much use. The money is spent.

The spending, which was approved by the Australian Energy Regulator, was roundly criticised. When a new draft ruling was brought down late last year, the AER was not so accommodating.

It said the NSW distributors' spending proposals were about 50 per cent too high, and that the new ruling could cut the average household's electricity bill by about 10 per cent.

What does this have to do with Victoria?

When you look at international comparisons, poles and wires in NSW and Queensland are the easiest explanation for Australia's very high prices.

Whereas the old carbon tax contributed only about 4 per cent of your power bill, the poles and wires are (as we've seen) about half of it.

But Bruce Mountain, a former advisor to the Australian Competition and Consumer Commission who has worked in electricity markets around the world, said it didn't make much sense to compare prices for Australia as a whole, since bills in different states are made up of such different things.

An analysis Dr Mountain conducted in 2012 for the Energy Users Association of Australia compared prices in 91 localities worldwide, including all European Union countries and all states in the US.

Four of the six most expensive places for electricity were Australian states. Victoria ranked sixth.

A subsequent analysis by Dr Mountain, this one for the Brotherhood of St Laurence, found that residents in Victoria spent a lot less of their electricity bill paying for poles and wires compared to people in other states.

Remember up above, when we said the average bill in Australia was 39 per cent "market" costs, 53 per cent "network" costs and 8 per cent "environmental" costs?

In Victoria the environmental cost is still 8 per cent of the bill, but the "market" and "network" costs make up 46 per cent of a bill each and the total cost per unit of electricity differs only marginally.

That means that, in Victoria, a lot less is spent on polls and wires and a lot more goes to wholesale and retail.

We've got the coal right here – why is it so expensive?

In Victoria, at least, the short answer is: it's not. There is, effectively, no other buyer for Victoria's coal. Brown coal is not exported, so the only consumers of the coal dug out of the LaTrobe Valley are the power plants of the LaTrobe Valley.

Victoria has an estimated 430 billion tonnes of brown coal, most of it in the Gippsland Basin. About 65 billion tonnes of that is in the LaTrobe Valley, and the seams in that area can begin just 10-20 metres underground. It's some of the most accessible coal in the world, and that helps to make it very cheap.

This is reflected in wholesale prices, which have been pretty flat over the past seven years.

So, if the wholesale price is steady and the cost of transmission hasn't been blown out by "gold plating", where is our money going?

There's only one place left for it to go: to the people selling the electricity.

Dr Mountain's report for the Brotherhood found retail costs – that's the money you pay to the power company – had more than tripled since 2008. Last year that money was somewhere between $371 and $471 per household.

So, why do they charge us so much for electricity? The best answer may be simply that they can.